What is the yield-to-maturity (YTM)of a four-year annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

Question

Quizplus · Accepted Answer

Using the bond pricing formula, we get:

P = (C / r) × [1 - 1 / (1 + r)^n] + (F / (1 + r)^n)

where 
P = Bond Price = $932.35
C = Coupon Payment = 0.04 × $1,000 = $40
r = Yield to maturity (YTM)
n = Number of years to maturity = 4
F = Par Value = $1,000
 
Now, substituting the values, the equation becomes:

932.35 = (40 / r) × [1 - 1 / (1 + r)^4] + (1,000 / (1 + r)^4)

Using trial and error or a financial calculator, we get a YTM of 5.95%. Therefore, the best choice is C.

What Is the Yield-To-Maturity (YTM)of a Four-Year Annual Pay Bond